What You Need to Know About Military Education Benefits and Tax Deductions

Students who are using military benefits for education may be interested to know how those benefits affect their tax returns. While it is always best to seek the advice of a tax professional when you have specific questions about your individual return, there are some tax breaks that you may be eligible to take advantage of if you are furthering your education.
 

GI Bill Benefits and Taxes 

One of the most common questions about educational benefits and taxes is whether the funds you receive via tuition assistance or under the GI Bill (whether you used the Montgomery GI Bill, the Post 9/11 GI Bill or the Forever GI Bill) are taxable. The short answer is no. Although you will receive a Form 1098-A to show what the VA paid you—and this is important if you paid any of your educational expenses out of pocket—you do not need to claim education funds awarded from the military as taxable income. This applies both to the benefits paid directly to your school for tuition and the basic housing allowance (BHA) paid directly to you. If, for some reason, you have claimed VA benefits as income in the past, it may not be too late to file an amended return and have your taxes for that year reduced, which could result in a refund.
 
Knowing the amount of the benefits paid to you by the VA is important if you want to take advantage of an educational tax credit. The Tax Cuts and Jobs Act of 2017 may have eliminated certain tax breaks for those saving for college or paying back student loans, but it kept several tax credit programs, including the American Opportunity Credit and Lifetime Learning Credit. Depending on where you are in your educational journey, you may qualify for one of these credits.
 
The American Opportunity Tax Credit (AOTC) provides a credit of up to $2,500 ($1,000 of which can be refunded) for anyone in their first four years of postsecondary education, provided they have not completed their education before the end of the tax year. You must be enrolled at least half-time in an academic period during the year and be working toward a degree or other recognized credential.
 
The Lifetime Learning Credit (LLC) offers a credit of up to $2,000 for qualified expenses. While the AOTC can only be used for up to four years, there is no time limit on the LLC, and there aren’t any enrollment restrictions. For this reason, the LLC is usually used by graduate students or those taking courses to finish a degree or attempting to further their careers by taking skills building courses.
 
What does all of this have to do with the GI Bill? If you pay any portion of your educational expenses out-of-pocket, you may qualify for one of these credits. You will have to do some calculations, but you can potentially save on your taxes by doing so. To calculate the amount to apply toward the credit, you must deduct the amount the GI Bill paid toward your tuition from the total amount paid, and the remaining amount is your qualified expense for tax credit purposes. This does not include the Basic Housing Allowance, but only the amount paid directly to the school. Also, keep in mind that you must meet income guidelines to qualify for either credit.
 

What Qualifies as an Expense?

If you plan to take one of the tax credits, it’s important to understand what qualifies as an expense. Under the IRS rules, a qualified expense is books, course materials and equipment, required fees, supplies and tuition. As with any deduction, you will need documentation of what you spend, so save your receipts. You will also need documentation of your tuition bills, your Form 1098-A, and in the case of the AOTC, a copy of your transcript from school.
 
Again, this information is not meant to substitute for the advice of a qualified tax professional. Because the rules change regularly, check with your tax preparer or accountant to ensure that you are following the most up-to-date rules.
 
To learn more about how Columbia Southern University supports active-duty military members and veterans, visit ColumbiaSouthern.edu/Military.